D. Ben Berry says his company's regulatory obligations are getting so heavy that it is considering having customers absorb some of the expense.
Most bankers are reluctant to raise rates or fees because of competitive pressures, but Mr. Berry, the president and chief executive of Gateway Financial Holdings in Elizabeth City, N.C., says he might not have a choice.
"With the added regulatory emphasis on corporate governance as well as the Bank Secrecy Act because of terrorism," he said, "we've had to centralize our compliance process, hire a full-time Bank Secrecy officer, and hire outside consultants just to make sure we're doing everything right. If these costs escalate, we may have to pass the costs on to our customers in the form of higher service charges and higher interest rates on loans."
Mr. Berry is not alone. Ninety percent of the 90 bankers attending a Ryan Beck & Co. Inc. investor conference in New York last week said in a survey by the firm that compliance has become a burden, and nearly as many (87%) said the costs of complying with the federal Sarbanes-Oxley Act outweigh the benefits. (Congress passed the law in 2002 in response to accounting scandals at Enron, WorldCom Inc., and other companies.)
Another survey respondent, George Strayton, the president and CEO of the $2.5 billion-asset Provident Bancorp in Montebello, N.Y., said in an interview that Provident has spent a "high-six-figure" sum to comply with Sarbanes-Oxley and that earnings have fallen somewhat as a result.
But along with the higher compliance costs and lower profits come "reliable" earnings statements, Mr. Strayton said, and many shareholders and would-be investors may like that tradeoff.
"And quite frankly, that's a good thing," he said.
Despite the increased costs, and even though 55% of the survey group said competition has intensified, most predict that their bank's performance will improve next year. Nearly 40% expect double-digit loan growth; 76% expect core deposit growth of more than 10%; 86% expect net interest margin to remain the same or expand; and 62% said credit quality should remain the same.
Mr. Berry said the $412.2 million-asset Gateway plans to open six branches in early 2005 in southern Virginia and in North Carolina's Outer Banks. As such it expects loans and deposits to increase as much as 50% next year.
Likewise, Mr. Strayton predicts strong growth at Provident because the economy in the Hudson Valley area is robust, with relatively low unemployment.
Ninety percent of the bankers surveyed said they expect their company's stock price to rise in 2005, yet 89% said they expect the price-to-earnings ratio to remain the same or be lower.
Ben Plotkin, Ryan Beck's chairman and CEO, says there is a disconnect between those two expectations.
"Most bank companies will not be able to grow their earnings enough to offset a reduction in their P/E multiples, so their stock prices may not rise," Mr. Plotkin said in an interview Tuesday.
Multiples could get lower at many banks as interest rates rise and the yield curve between long- and short-term rates begins to flatten, he said. "I think the bankers who responded to this survey are pretty optimistic about how their earnings are going to really expand, but in my experience, it'll be difficult."
